Growth slows at Sainsbury

Supermarket J Sainsbury (SBRY) has revealed further solid sales performance in a second-quarter trading update. In the 16 weeks to 29 September, group like-for-like sales grew 1.9 per cent, meaning that underlying sales were up 1.7 per cent in the first half (including fuel). That's better than the grim looking 0.6 per cent slide in like-for-like sales reported by rival Tesco with its half-year figures last week, but it's still less than the 5.1 per cent like-for-like sales growth (including fuel) seen in the first half of 2011.

Inevitably, chief executive Justin King pointed to the "unique and special summer" - wet weather, the Jubilee and the Olympics. He also expects the "challenging economic backdrop to persist". Still, there's evidence that the group's non-food offering is holding up well - the pace of growth there is around three times that of the food side, with sales of jeans, for example, doubling on a year earlier. The focus on smaller convenience stores is ongoing, too, with 49 such stores opened in the half, compared with just five conventional supermarkets. And the online business delivered sales growth of over 20 per cent year on year.

Investec Securities says...

Sell. Trading was a touch better than expected, but analysis of the figures reveals concerns for Sainsbury's and the industry. Like-for-like sales rose 0.9 per cent, excluding exceptionals, and were flattish when mature stores are stripped out. Moreover, strip out inflation, as well as growth in convenience and internet sales, and like-for-like volumes fell over 3 per cent in the core estate. Sainsbury may not be in as bad a position as its competitors, but this rate of volume decline will present major problems. Our 280p price target reflects many of the risks. Expect EPS of 29.5p in the 12 months to March 2013 (from 28.7p for 2012).

Seymour Pierce says...

Hold. Sainsbury has maintained steady growth in a highly competitive market and, by focusing on its own agenda - rather than being drawn into the aggressive vouchering efforts seen over the summer - margins have been held. Still, the shares have rallied by 13 per cent in the past three months and trade at a small premium to those of its peers. We would look to take profits as we believe inflation will return, which has not proved to be good news for the sector's volumes or margins. We expect full-year adjusted EPS of 28.6p and our price target stands at 320p.